Argentina in recession and defaults on its debts again.

An economic analyst recently commented that Argentina's management of its economy was "a textbook study of bad government." Unlike other South American countries, like Brazil and Chile, Argentina is once more in recession and suffering the classic symptoms of stagflation with declining GDP and rising inflation. The fact that it has recently gone into technical default on its debts for a second time since 2002 will make it almost impossible in the short term to regain access to the international money markets to relieve some of its economic problems. Standard & Poor's have downgraded Argentina's position to 'selective default' prompting share prices to fall sharply.

Argentina unilaterally defaulted on its debts of US$80bn in 2002, having gone deeply into recession following the contraction of its GDP over the previous two years by some 11%. Most bondholders accepted the inevitable, significantly reduced returns in the debt restructuring deals of 2005 and 2010. But several creditors decided to take Argentina to the US courts for full payment (amounting to some US$1.3bn). This went to the US Supreme Court in June which upheld the lower court's ruling that Argentina should pay $1.33bn to the 'hold-outs' and preventing Argentina from continuing to pay those who had accepted the debt restructuring agreements until they had paid those who had not.

Argentina held out against this, despite court-prompted attempts at mediation, and went into technical default on 30 July. There are strong pressures, domestic and international, on Argentina to come to some arrangement but President Kirchner's government has preferred to brand the 'hold-out' creditors as 'vulture funds' and the US authorities as being wholly responsible for the impasse. A prolonged default will only worsen Argentina's current recession and put yet further pressure on Argentine Government reserves, which have been significantly depleted over the last few years.

This is not to say that Argentina has not been trying to get out of the mess that it got itself into. It has sought settlements with major creditors like Repsol and the Paris Club this year. But its defiance of the US courts and the vitriol of its rhetoric against the so-called 'vulture funds' makes it unlikely that it will be able to regain financial credibility on the international scene any time soon. Yet other countries, like Uruguay which defaulted in 2003, were able to regain access to global capital markets within a year or so of default by working closely with the IMF. Not so Argentina, which has merely provided another example of its readiness to ignore its international obligations whenever it sees fit. If Argentina can act like this in one sphere, what faith can be placed in it keeping to its constitutional commitment to pursue its sovereignty claim over the Falklands by political rather than military means? On the precedent of 1982, very little."